Georgetown Ltd purchased a block of land on 31 March and paid $400 000 cash to the land owner. An independent evaluation reveals that the land is worth $500 000. Using historical cost as a measurement base, how should Georgetown Ltd recognise this purchase of land in its financial statements?
A) $400 000 recognised as an asset (land) and $100 000 as a liability.
B) $400 000 recognised as an asset (land).
C) $500 000 recognised as an asset (land).
D) The land should not be recognised as an asset as it cannot be reliably measured.

Question

Quizplus · Accepted Answer

Under the historical cost measurement base, the cost of the asset is recognised as its initial acquisition cost, which in this case is $400,000. The fact that the land is currently worth $500,000 is not relevant under this measurement base. Therefore, the land should be recognised as an asset (land) with a value of $400,000. There is no liability associated with the purchase of land, so choice A is incorrect. Choice C is incorrect because it does not take into account the historical cost measurement base. Choice D is incorrect because the land can be reliably measured - its cost is $400,000.

Georgetown Ltd Purchased a Block of Land on 31 March